Clause 21(c) of Form 3CD: Partner Remuneration & Interest Under Section 40(b) (AY 2026-27)
Updated: Sep 28
Clause 21(c) of Form 3CD requires the tax auditor to report interest, salary, bonus, commission or remuneration debited to the profit and loss account that is inadmissible under section 40(b) or section 40(ba). For AY 2026-27 (FY 2025-26), this is especially relevant for partnership firms and LLPs because the section 40(b) working-partner remuneration limits were increased from 1 April 2025. The clause is not a disclosure of every payment to partners or members; it is a reconciliation of the amount debited, the amount legally admissible and the amount that must be disallowed.
AY 2026–27 update (28 September 2026): CBDT changed the ordinary tax-audit report date from 30 September to 21 October 2026 and the related audited return date from 31 October to 21 November 2026. Separate transfer-pricing dates are unchanged. Official CBDT announcement
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Clause 21(c) of Form 3CD: What Exactly Must Be Reported?
The reporting focus is the inadmissible portion of partner or member payments. In practical terms, the auditor should start from the ledger and partnership/AOP records, identify interest and remuneration-type debits, test them against section 40(b) or 40(ba), and report the amount that cannot be deducted while computing business income.
Interest paid or payable to partners that fails the partnership-deed conditions or exceeds the statutory rate ceiling.
Salary, bonus, commission or other remuneration to a partner that is not a working partner, is not authorised by the partnership deed, relates to a period before the deed authorises it, or exceeds the section 40(b)(v) ceiling.
Interest, salary, bonus, commission or remuneration paid by an AOP or BOI to a member where section 40(ba) makes the payment inadmissible, subject to the statutory adjustment rules.
Only the inadmissible amount should flow into the tax computation; the gross ledger debit and admissible portion should remain reconcilable to the books.
Section 40(b) Partner Interest: What Should the Auditor Test?
For a firm or LLP taxed as a firm, section 40(b) restricts deduction of payments to partners. Interest should be supported by and be in accordance with the partnership deed, should relate to a period for which the deed authorises the payment, and is not deductible to the extent the rate exceeds 12% simple interest per annum. A deed providing a lower rate creates an even lower contractual ceiling.
The audit file should therefore reconcile partner-wise opening capital/current-account balances, additions and withdrawals, the interest rate actually applied, the deed clause, the period of authorisation and the amount charged to the profit and loss account. Where the books apply 15% but the statutory ceiling is 12%, the excess component is a Clause 21(c) disallowance even if the full amount was actually paid.
Partner Remuneration Limit for AY 2026-27 Under Section 40(b)(v)
For AY 2026-27, the revised working-partner remuneration ceiling applies. On the first ₹6,00,000 of book profit, or in the case of a loss, the maximum deductible amount is ₹3,00,000 or 90% of book profit, whichever is higher. On the balance of book profit, the ceiling is 60%. These enhanced limits took effect from 1 April 2025.
The ceiling is only one condition. Remuneration must also be paid to a working partner, must be authorised by and in accordance with the partnership deed, and cannot relate to a period before the relevant authorisation. A mathematically permissible payment can still be inadmissible if these legal conditions fail.
Worked Example: How Clause 21(c) Disallowance Is Computed
Assume a partnership firm has section 40(b) book profit of ₹10,00,000 and the deed validly authorises remuneration to its working partners. The firm debits ₹9,00,000 as partner remuneration.
First ₹6,00,000 of book profit: 90% equals ₹5,40,000, which is higher than ₹3,00,000.
Balance book profit of ₹4,00,000: 60% equals ₹2,40,000.
Maximum remuneration under the numerical ceiling: ₹7,80,000.
Remuneration debited: ₹9,00,000.
Inadmissible excess for Clause 21(c), assuming all other conditions are satisfied: ₹1,20,000.
If the same firm also paid partner interest at 15% per annum, the interest computation must separately identify the portion above 12% as inadmissible. The final Clause 21(c) working should therefore combine the inadmissible interest and inadmissible remuneration, while preserving partner-wise supporting schedules.
Section 40(ba): Payments by AOP or BOI to Members
Clause 21(c) also expressly captures section 40(ba). This provision deals with interest, salary, bonus, commission or remuneration paid by an association of persons or body of individuals to its members. The statutory rule is materially different from the working-partner framework for firms, so an AOP or BOI should not mechanically apply the section 40(b) remuneration slab. The tax-audit working should identify member-wise payments and apply the specific section 40(ba) rule and its adjustment mechanism.
Clause 21(c) Audit Reconciliation: Practical Workflow
Extract all partner/member ledgers and the remuneration, commission, bonus and interest expense ledgers from the general ledger.
Obtain the operative partnership deed, LLP agreement or AOP/BOI constitution and all amendments effective during FY 2025-26.
For firms/LLPs, identify working partners and verify whether remuneration and interest are expressly authorised for the relevant period.
Compute section 40(b) book profit independently rather than using accounting profit without adjustment.
Apply the ₹6 lakh/₹3 lakh/90%/60% remuneration formula and separately test partner interest against the applicable contractual and statutory ceiling.
For AOPs/BOIs, apply section 40(ba) instead of the partnership-firm formula.
Reconcile the gross P&L debit, admissible amount, inadmissible amount and amount carried to the return computation.
Cross-check the final inadmissible figure with the corresponding ITR business-income disclosure before Form 3CD is uploaded.
Common Clause 21(c) Mistakes
Reporting the entire partner remuneration debit instead of only the inadmissible portion.
Using the old ₹3 lakh/₹1.5 lakh remuneration slab for AY 2026-27 instead of the amended ₹6 lakh/₹3 lakh slab.
Treating every partner as a working partner without checking the deed and actual role.
Computing the remuneration ceiling on ordinary accounting profit instead of section 40(b) book profit.
Ignoring a deed amendment made during the year and allowing remuneration for a period before it became authorised.
Testing only the interest rate but not whether the deed authorises interest and the relevant period.
Applying the section 40(b) partnership formula to AOP/BOI member payments governed by section 40(ba).
Failing to reconcile the Clause 21(c) disallowance with the ITR computation, creating a validation or assessment mismatch.
Documents to Keep Ready Before Tax Audit
Partnership deed/LLP agreement/AOP constitution and all amendments.
Partner or member capital and current-account ledgers.
Working-partner identification and role documentation.
Partner remuneration and interest computation schedules.
Section 40(b) book-profit reconciliation.
Proof of the dates on which deed clauses became effective.
Tax computation showing the exact add-back of the inadmissible amount.
Form 3CD-to-ITR reconciliation working paper.
Frequently Asked Questions
Does Clause 21(c) report all remuneration paid to partners?
No. The clause is concerned with the amount inadmissible under section 40(b) or 40(ba). The audit working may begin with the full debit, but the reported disallowance should reflect the legally inadmissible portion.
What is the partner remuneration limit for AY 2026-27?
For a qualifying working-partner payment under section 40(b)(v), the ceiling is ₹3,00,000 or 90% of the first ₹6,00,000 of book profit, whichever is higher, plus 60% of the balance book profit. The deed and working-partner conditions must also be satisfied.
Is partner interest above 12% deductible?
No deduction is available for the portion exceeding the section 40(b) statutory ceiling of 12% simple interest per annum. A lower rate in the deed can restrict the deductible amount further.
Does the same rule apply to AOP member remuneration?
No. AOP/BOI member payments are governed by section 40(ba), which has its own rule. They should not be tested using the partnership-firm remuneration slab.
How does Clause 21(c) connect with the income-tax return?
The Income Tax Department validation framework maps the inadmissible interest, salary, bonus, commission or remuneration figure to Clause 21(c). A clean reconciliation between Form 3CD and the return therefore reduces avoidable mismatches.
Related PGT & Associates Tax Audit Resources
For the wider disallowance framework, see Form 3CD Clause 21 for AY 2026-27. For filing context and deadlines, use Tax Audit AY 2026–27: Forms 3CA/3CB/3CD, now due 21 October. You can also navigate the complete Form 3CD clause list and reconciliation hub.
Practical Takeaway
Clause 21(c) is best treated as a partner/member-payment reconciliation rather than a form-filling exercise. For AY 2026-27, firms should pay particular attention to the revised remuneration slab effective from 1 April 2025, deed authorisation, working-partner status, section 40(b) book profit and the 12% partner-interest ceiling. AOPs and BOIs need a separate section 40(ba) analysis. The strongest audit file is one in which the ledger debit, statutory computation, Clause 21(c) amount and ITR add-back all agree.
PGT & Associates assists businesses and professional firms with tax-audit reconciliations, Form 3CD review and documentation. The discussion above is general professional information and should be applied to the facts and governing documents of the relevant assessee.
📥 Free Download: AY 2026-27 Form 3CD Working Paper & Tax Audit Checklist (Excel)
Preparing for Section 44AB tax audits? Ensure seamless clause-by-clause verification, Section 43B(h) MSME compliance, and Clause 44 GST reconciliations with our complete working paper suite.
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